3rd Quarter 2006
Current Account Balance, 3rd Quarter 2006:
Annualized Growth Rate for the Current Account Balance, 3rd Quarter 2006 (relative to the 3rd Quarter of 2005):
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The following perspective is excerpted from a speech given by Federal Reserve Chairman Ben S. Bernanke at the Fourth Economic Summit at the Stanford Institute for Economic Policy Research in Palo Alto, CA on March 2, 2007. In it he looks at the effects of financial globalization on the U.S. economy, and how demand for U.S. investment assets has exacerbated our current account imbalance:
“… [S]trong foreign demand for U.S. long-term debt has been one factor tending to reduce the term premium, the extra return that investors demand to hold longer-term bonds. All else equal, a smaller term premium implies a lower level of long-term interest rates. At the same time, increases in the net supply of saving in global capital markets--which, to a significant extent, are a product of the large current account surpluses of some emerging-market economies and of oil-producing nations—have resulted in lower real long-term interest rates both in the United States and abroad. Clearly, to understand and evaluate the behavior of the term structure and to assess the implications of current yields for the domestic economy, the Fed must take into account the various effects of foreign capital flows on U.S. yields and asset prices, a task that can be quite challenging.”
The following perspective is excerpted from a speech given by Federal Reserve Vice Chairman Donald L. Kohn at the European Economics and Financial Centre Seminar, House of Commons, London, England on July 6, 2006. In it he discusses how the demand for dollar assets has helped fuel the growth of the U.S. current account deficit:
“…The second force affecting global imbalances has been the continuing strong demand for dollar assets, without which exchange rates and other prices already would have adjusted to limit the growth of the imbalances. Arguably, it was this strong demand, in response to the step-up in productivity growth in the United States and the Asian financial crisis that appreciated the dollar in the late 1990s and initiated the string of large U.S. current account deficits. But the demand has continued this decade, albeit with some fluctuations, financing the growing U.S. current account deficit.
“Private investors apparently perceive opportunities for relatively high returns on dollar assets in light of the more rapid growth of productivity in the United States than in many other industrialized economies. The attraction of dollar assets likely also is enhanced by the liquid nature of the markets in which they trade and because as collateral these assets are protected by the rule of law and have been a safe haven in times of stress. The globalization of financial markets and the increased willingness of investors to look beyond their own borders for opportunities may well have facilitated the transfer of savings needed to sustain the U.S. current account deficit. In that regard, both the pull of global demands for our assets as well as the push of our needs to finance our trade imbalance explains the current conjuncture.
“Foreign official holdings of dollar assets also have risen substantially, especially in Asia. Governments there apparently read one lesson of the financial crisis of the 1990s as the need for a large war chest of reserves. In addition, against the backdrop of very high private saving rates, they may be concerned about their ability to generate sufficient domestic demand to provide employment opportunities, in some cases for the growing numbers of people who want to shift from agriculture to higher productivity jobs often in urban areas.
“Although private and government demands for dollar assets have allowed the U.S. current account deficit and foreign surpluses to persist, these imbalances are not sustainable indefinitely. In the United States, both public and private saving will need to rise to meet the oncoming needs of an aging population. At some point, risk-adjusted returns on investments in the rest of the world will begin to look favorable relative to holding dollar assets. Dollar assets are becoming an increasing proportion of non-U.S. portfolios; this can continue for a time, but not forever. At some point, the United States is going to need to finance its imports with the proceeds of its exports, not with foreign saving.
“Experience with current account adjustments by industrialized economies--for example, by the United States in the 1980s--suggests that the transition to a more sustainable configuration is not likely to be disruptive. But we cannot be sure, particularly because the U.S. experience is unique given the dollar’s role as a reserve currency and Americans’ relatively favorable returns on assets held abroad. The world economy is in uncharted territory with regard to the size of the imbalances. Various asset markets have experienced rather sharp fluctuations in prices in recent decades, some of which have threatened disruption in the United States and have contributed to sluggish growth elsewhere, as in Japan following the real estate boom and bust; we certainly cannot rule out the possibility of further sharp asset price movements as product prices and spending adjust. Recent research reinforces the common-sense conclusion that no single policy or private action will be sufficient to effect the necessary changes. Adjustment will need to proceed along several dimensions at the same time, including changes in relative prices and in domestic demand around the globe. “
This excerpt is from a news release by the U.S. Bureau of Economic Analysis that describes U.S. International Transactions. It was released on September 16, 2005. It describes the current status of the various U.S. balance of payments accounts:
"The U.S. current-account deficit--the combined balances on trade in goods and services, income, and net unilateral current transfers--decreased to $195.7 billion in the second quarter of 2005 (preliminary) from $198.7 billion (revised) in the first quarter. The decrease was more than accounted for by a decrease in net outflows for unilateral current transfers. A small increase in the surplus on services also contributed. In contrast, the balance on income shifted to a deficit from a surplus, and the deficit on goods increased.
- The deficit on goods and services increased to $173.3 billion in the second quarter from $173.1 billion in the first.
- The deficit on goods increased to $186.9 billion in the second quarter from $186.3 billion in the first.
- Goods exports increased to $223.5 billion from $213.8 billion. Much of the increase was in capital goods, in industrial supplies and materials, and in foods, feeds, and beverages.
- Goods imports increased to $410.5 billion from $400.2 billion. Both petroleum products and nonpetroleum products increased. The increase in nonpetroleum products was mostly accounted for by an increase in capital goods.
- The surplus on services increased to $13.6 billion in the second quarter from $13.3 billion in the first.
- Services receipts increased to $93.7 billion from $92.6 billion. The increase was more than accounted for by an increase in travel. "Other" transportation (such as freight and port services) and passenger fares also increased. These increases were partly offset by decreases in "other" private services (such as business, professional, and technical services, insurance services, and financial services), and in royalties and license fees.
- Services payments increased to $80.1 billion from $79.3 billion. Increases in "other" private services, in travel, and in passenger fares were partly offset by a decrease in "other" transportation."
The following perspective is an excerpt from a paper presented at the Globalization seminar of the Conference of European Statisticians on June 12, 2003 in Geneva, Switzerland. It was written and presented by 2 economists from the U.S. Bureau of Economic Analysis, J. Steven Langefeld and Ralph Kozlow. They discuss the effects of multinational corporations on the Balance of Payments accounts.
"Globalization has placed new demands on statistical agencies to provide the information necessary to inform policy in today's increasingly interdependent world economy. This globalization has manifested itself in the interdependence of financial markets, the increasing role of multinational corporations (MNC's), the transfer of technology, the increasing dependence of domestic markets on foreign trade, and the necessary interdependence of monetary, fiscal, and regulatory policy. Indeed, this interdependence in policy has led to increased demands for harmonization in world statistical standards. These include work to harmonize, standardize, and update the System of National Accounts (SNA) and the Balance of Payments Manual (BPM); the development of international data dissemination standards; and development and issuance of a series of handbooks ranging from International Trade in Services to Tourism.
Much of this work has involved filling gaps in coverage required by changes in the economy using conventional data collection methods and the existing structure of the national accounts. Providing the information needed for evaluating the economic impact of MNC's, however, normally requires the development of direct surveys of companies that capture data on the overseas activities of their foreign affiliates, and the development and/or use of alternative accounting structures. Despite the cost to statistical agencies and the burden imposed on business respondents by these surveys and alternative structures, the sheer size, growth, and impact of multinational companies have motivated a number of countries to develop, or consider developing, such data.
A leading example is the United States, which is both the world's largest direct investor and the host of the world's largest stock of inward direct investments. At yearend 2001, the value of the U.S. direct investment position abroad was $1.6 trillion, and the value of the foreign direct investment position in the United States was $1.5 trillion. In 2000, U.S. exports and imports of goods associated with MNC's headquartered or investing in the United States totaled nearly $1.3 trillion and accounted for over half of U.S. imports and nearly three-fourths of U.S. exports. U.S. parent companies, their foreign affiliates, and U.S. affiliates of foreign companies together employed about 37 million people in the United States and abroad in that year (28 million were in the United States, of a total workforce of about 130 million). The combined gross product of U.S. parents and U.S. affiliates accounted for one-fourth of the U.S. gross domestic product.
Although some countries do not maintain data on direct investment, recent estimates by the United Nations illustrate the significance of MNC's worldwide. It estimates worldwide sales by foreign affiliates in 2001 at $19 trillion, or more than double the size of world exports in 2001. (In comparison, in 1990, sales by foreign affiliates were only about 25 percent larger than world exports.) Over the period 1990-2001, the world stock of outward direct investment increased an average of 13 percent per year, from $1.7 trillion to $6.6 trillion, compared to an annual growth rate of world current-dollar GDP of 3.5 percent. In 2001, foreign affiliates accounted for one-third of world exports."